Brooke’s Note: Ron Rhoades is an academic in his approach to world. But one reason that he is also a force outside the university bubble is because he goes outside the bubble and humbly observes. Recently he made his way from upstate New York to Kansas (Is that even possible?) to see what he could see of 300 advisors who are doing things differently. Here is his report.

I attended the Garrett Planning Network’s 13th Annual Retreat, held in Kansas City, Mo., from July 26 to 28, with the intention of observing a group of people that are, by their actions, bringing the RIA industry closer to what sometimes seems a utopian ideal: a world in which advisors act under the same pure fiduciary code, one that serves the interests of the client first, last and always.

At the conference, I met with a former large wirehouse firm financial advisor who, unwilling to continue to push expensive (and often proprietary) products upon clients, started up her own RIA and joined the Garrett Planning Network just last year. I also met several long-term members of the network, which has a very high retention rate, each of whom spoke at length about the collegiality of the Network, the willingness of its members to share practice ideas with each other, and the many resources of the Network, including but not limited to its “Garrett Knowledge Bank,” monthly coaching calls on both practice management and marketing ideas; financial planning case studies; compliance assistance; and the members’ online discussion forum. See: Eavesdropping on the 11th Annual Garrett Planning Network Retreat.

Nearly all of the members also mentioned the referrals they gained from the “Find a Garrett Financial Advisor” website search function. Sheryl Garrett notes that the average GPN member receives two referrals each month from the resource and her internal surveys indicate that half of such referrals actually become clients. A few members told me of how they built their initial base of clients from the “Find a Garrett Financial Advisor” searches, before disengaging from the website search function as referrals from existing clients poured in and they ended up with far more new prospects than they could handle. See: Influential fiduciaries endorse bootstrapping advisory-industry SRO.

Additionally, Emerge Financial Wellness, which serves 45,000 retirement plan participants, recently partnered with Garrett Planning Network to provide its plan participant’s access to GPN members for financial planning and advisory services from the network. Emerge’s clients receive a 25% discount on GPN members services for the first year. Garrett indicated that other organizations have approached her to partner with the Garrett Planning Network, as they seek out financial advisors “just like GPN members.”

AUM conflicts and remedies

GPN members shared that, by providing services for hourly fees (and many for flat fees), they feel very well compensated. For most advisors, this is not achieved by putting in long work weeks: A recent GPN survey reported that its members’ average workweek was only 36 hours. Rather, the professional-level compensation flows from a steady stream of clients and highly efficient practices. See: 5 ways for stressed-out advisors to build a more efficient practice.

When we compare the professions of today, such as law and accountancy, we see similar comparisons. Many lawyers and certified public accountants work as sole proprietors or in smaller firms, similar to most GPN members. Lawyers (all of the time) and CPAs (in many engagements) are fiduciaries to their clients, as are GPN members. And most lawyers and CPAs charge hourly fees, or project (flat) fees, or some combination thereof — again, similar to GPN members.

While GPN members are not prohibited from charging asset-based fees, only about 20% do. This is likely a reflection of the fact that many feel uncomfortable with the assets-under-management business model. Several of the members I spoke to spoke of the importance of remaining objective, and how AUM fees could create conflicts of interest as to issues involving whether to pay down current debt or to annuitize a portion of a client’s wealth. Other members questioned why a higher AUM client should necessarily pay a much higher fee than a lower-AUM client, when the clients were often receiving the same level of services.

Ron Rhoades: Hourly based fees can sometimes lead to unwarranted suspicions from a client that the professional is stretching out an engagement in order to generate a greater fee.

This writer does not suggest that hourly-based fees are perfect, and neither do the GPN members. Hourly based fees can sometimes lead to unwarranted suspicions from a client that the professional is stretching out an engagement in order to generate a greater fee. However, GPN members note how they avoid most of such suspicions, which could otherwise undermine the financial planner-client relationship, by providing an estimate of the time required to undertake the planning requested.

Flaws in flat and hourly fees

The well-known “Picasso story” illustrates a different concern without hourly-based fees. Legend has it that Pablo Picasso was sketching in the park when a bold woman approached him. “It’s you — Picasso, the great artist,” said the woman. “Oh, you must sketch my portrait! I insist.” So Picasso agreed to sketch her. Five minute later he handed her the sketch of her portrait, stating, “Madame, that will be 10,000 franks.” The woman replied, “This portrait is lovely, but it only took you five minutes to draw it.” To which Picasso responded, “Madame, it took me my entire life.”

In essence, hourly fees tend to reward inefficient planning. Experienced planners might require just a few minutes to spot and analyze an issue which less experienced financial planners might spend several hours researching. Raising one’s hourly fee rate helps to correct this situation, but can also result in higher fees for clients who require sometimes time-consuming yet basic financial planning such as the steps required to establish a monthly budget.

However, as noted above, for some financial plans GPN members have moved to a flat fee. Often the amount of the flat fee is quoted after the advisor determines the likely complexity of the issues involved in the financial plan and the likely time required to prepare and present the plan.

Model of the future?

Over the past two months this writer has been inundated with inquiries regarding Wall Street’s claims that small clients cannot be served under a fiduciary business model. To each inquirer I point out that the Garrett Planning Network’s members, and many other fee-only advisors across the country, are already serving this market. In fact, these fee-only advisors provide, on average, far more and better financial advice, and for fees that are often dramatically lower than the fees paid by customers of non-fiduciary advisors. See: Why keeping FINRA from ruling RIAs is critical to these firms, the investor — and even the U.S. economy.

Indeed, the business model used by members of Garrett Planning Network, with its professional-level compensation arrangements, may prove to be the future of financial advice should a bona fide fiduciary standard be imposed upon all providers of personalized investment advice. Instead of commissions and asset-based compensation arrangements, reasonable hourly and fixed fees would likely dominate the arena of financial services, and financial advice would be available to everyone.

In essence, as consumers, with the aid of the media, wise up to the excessive extraction of fees and costs by Wall Street, more and more consumers will be attracted to the Garrett Planning Network, its members, and their reasonable hourly or fixed fee model. And, as advisors search for the right business model to provide expert-level compensation with minimal conflicts of interest, more and more advisors will be attracted to the Garrett Planning Network as well. For GPN members, and consumers who have located them, the future appears bright.

Lee Pence said:

August 8, 2013 — 9:09 PM UTC

And you know who is the biggest complainer of fees: Lawyers and those other professions who charge fees for a living. I welcome a different compensation model if we can just get rid of the regulations. It costs me $435 (cost of my time for paperwork, compliance, and regulations) to bring on a new client . If all people want is a $5500 Roth IRA they are not going to pay $125 to $250 to a fee-only planner to do it. There has to be a better way. We are pricing out the very people whom we should be trying to help. That is why most people who make less than $50,000 do not have one! And % 70 of Americans do not have a valid will or other necessary documents.

Lee Pence, <a rel="nofollow" title="R">CFP</acronym> </a>

Ron Rhoades said:

August 8, 2013 — 10:13 PM UTC

Lee, I concur with your concern about the regulations. While prior to the delivery of personalized investment advice there should be, in my opinion, some gathering of data to ensure that the advice meets the financial circumstances of the client, a lot of RIA’s compliance requirements are simply ill-advised.

Government’s essential function in the oversight process is to provide asset verification – i.e., to prevent actual fraud from occurring. After this is done, the oversight should not be any tougher than that provided to other professionals – such as lawyers and CPAs (neither of which possess requirements of regular inspections of their books and records, etc., although CPAs engaged in audits do submit one of their audits to peer review on a periodic basis).

If we are to progress to a true profession, bound together by a bona fide fiduciary standard of conduct, then we can adopt more specific principles which inform professionals more specifically of the Professional Rules of Conduct to which they may adhere. Private legal actions should be available as the means to enforce adherence to same, along with peer review by a professional organization (for purposes of sanctions, including suspension of registration).

All professionals possess difficulty in serving lower-income (or lower-asset-level) clients. Yet, there are business models that lend themselves to serving clients of limited means. These business models include hourly fees, flat fees, and even AUM (some firms offer AUM pricing for accounts as little as $5,000). In addition, there are direct-to-consumer sales approaches, not involving the delivery of investment advice but rather offering an all-in-one product, such as a target date fund.

I myself am have moved my larger clients from an AUM model to a flat fee retainer (billed quarterly). My current clients with less than $500k assets under advisement will remain at a 1$ annual fee.

But more changes might be forthcoming in my offering. I am considering offering three current programs.

1ST PROGRAM: FLAT FEE, PLUS ADDITIONAL TIME CAN BE PURCHASED. I am also considering launching a new initiative, offering a lower flat fee (the same for all clients, regardless of AUM) which includes a certain number of hours of financial planning advice each year; the client can purchase additional financial advice (if needed, which I suspect will be rare). Model portfolios would be utilized, involving passive mutual funds only. The annual fee would be $3,000 a year, and the AUM minimum would be $300,000. There would be no maximum. I’m not concerned about liability issues, as I believe the investment approach (due diligence thereon, and on the funds utilized) meets the prudent investor rule. I am, however, considering whether to charge more in the first year, depending upon the time necessary to establish/transfer accounts and undertake initial tax planning (often involving cost basis determinations, AMT estimates) and trading (including sales of current assets). Annual client meetings, by Skype or phone, would occur, and a “Total Client Profile” maintained for each client. Obviously this would be an attempt to undertake an “efficient” practice, with trained support personnel and junior advisors handling much of the data gathering and implementation work.

2ND PROGRAM: FLAT FEES, CUSTOMIZED TO TIME REQUIRED. Even then, clients who desire and need more extensive services, such as municipal bond selection and due diligence, would be directed to a different platform in my firm, where the fees are necessarily higher. Fees would be established as a flat fee, but based upon an estimate of the time necessary to conduct due diligence and/or otherwise properly advise upon the assets, or address more complicated issues. This is essentially my current program, which involves personal visits to clients at their home each year. (All my clients are on the East Coast of the U.S.). The minimum under this program for new clients might be changed to $500,000.

3RD PROGRAM. Hourly fees only, or perhaps two or three levels of flat fees (depending upon complexity of financial planning needs), for those who only need 2-4 hours of financial planning guidance. As an experienced financial planner, I can provide this advice by developing an “action plan checklist” as the conference proceeds. This typed document might also identify topics for future meetings (and annual checkups would be encouraged). This is not my desired manner of engagement of clients, but for some clients who are saddled with debt or just starting out, it is likely all they need and can afford. This program might be offered only to clients with less than $300,000 to invest.

I would note that many practice consultants suggest raising minimums, and getting rid of small clients altogether. However, as professionals I believe we have an obligation to provide services to all. Even a person who walks into a firm with $1,000 to invest deserves, in my opinion, advice which points them in the right direction (i.e, establish a cash reserve, pay down certain debt, then fund retirement accounts where a match occurs, then … etc., etc.) – even if the firm does not provide those services itself. Such clients can also be directed to use software such as YNAB for personal budgeting.

In essence, I don’t believe there is any perfect fee model. Commission-based compensation (if the commissions and other compensation do not vary depending upon the recommendation made) might be acceptable, as will be hourly fees, flat or fixed fees or retainers, or a percentage of assets under management approach. Or some combination of the foregoing. As the needs of various clients vary, so should our approach to compensation structures, in order to adhere to our professional obligations to keep the best interests of the client foremost, while ensuring professional-level compensation for ourselves.

Lee Pence said:

August 9, 2013 — 1:30 PM UTC

Very Good and articulate argument. I would like to discuss further.

Maybe we could write a paper together. I will be in touch. I just returned form a business trip and am trying to get caught up with paperwork.

Thanks.

Lee Pence <a rel="nofollow" title="R">CFP</acronym> </a>

Bill Hayes said:

August 15, 2013 — 2:48 PM UTC

Ron,

Your article raises some interesting discussions. Perhaps the most important one is where the profession is headed with regards to compensation.

While your actions with clients with less than $500K in truly commendable, it will not support the “profession,” or the “professional” for very long, and does create significant hurdles for those firms unable to reach the clients that you have been able to amass. After all, many in this profession are looking at this path as a full-time endeavor and not a supplement to teaching or some other Picasso like income stream, as perhaps many in the GPN network are inclined.

Also,this is not a situation where there are infinite clients with wealth over $500K. Perhaps this is why you note, “But more changes might be forthcoming in my offering. I am considering offering three current programs,” all of which seem to infer more income.

I would also point out that attorneys, and their practices, are not “surviving” in this current economic environment where Picasso talent is not transferable versus a knowledge based profession that is clearly easily accessed through the internet and in some cases is being supplanted currently by knock-off barristers. ( See…... http://www.forbes.com/sites/forbesleadershipforum/2012/05/08/why-more-law-firms-will-go-the-way-of-dewey-leboeuf/)

As an attorney, surely you understand the complexities of the legal world better than I do. However, coming from a family of generational lawyers the profession is not expanding as it has in the past and I would offer that compensation on an hourly basis is part of the reason.

The same can be applied to GPN. Having met the dynamic Sheryl Garrett, I believe she has the strength to move her firm forward, but I am concerned that the model is unsustainable over time. Recently, the CFP Board announced a very large and directed push to move more individuals into the profession. Obviously, more CFP Professionals will have significant impact on the profession as did the large number of law school attendees in the 80’s and 90’s (perhaps you were one of them) and the dramatic decrease in enrollment at law schools in the past decade.

My fear is the progression by both the profession, the CFP Board, and firms like GPN to an hourly fee practice is misguided. One has to look at the tyrants of the Financial Services industry to look for clues on this issue. While every player provides some sort of AUM model to garner profitability. The idea of an hourly fee has been seldom embraced.

While I concur with the often quoted conflict with regards to mortgage versus investment and therefore income to the professional, all other models seem ripe with more conflict than this.

It is not that I dislike the notion of hourly charges. It is that the economics of this compensation model has already shown its vulnerability within law practices. Given the stated objectives of the issuers of credentials to increase their numbers dramatically, is not a similar outcome inevitable and not avoidable.

Economics is a wonderful teacher here. Supply and demand in its purest sense has already shown that to be true in the legal profession. If the number of financial professionals charging hourly fees blossoms, couldn’t the result look much like the legal profession? Doesn’t that also damage the financial profession as individuals are no longer able to earn the necessary wages to sustain their professional existence?

This slippery slope is filled with other examples where supply and demand always triumphs. For example, can I sell you a tulip bulb?

Bill

Bruce Porter said:

June 11, 2014 — 7:09 PM UTC

Our RIA firm, SMB Financial Services/The Retirement Income Center (Lake Oswego, OR) works primarily with referrals from CPA’s. We want to accept all the referrals we receive from the CPA’s but sometimes there are not enough client assets to make it practical to create a business relationship on paper.

We solve the “limited means’ client problem by educating them on a pro bono basis, We typically spend a brief appointment educating them on what is available to them on a no-fee or low-fee basis, and then direct them or help them set up their own retail internet account with some low cost recommendations. It’s our way of giving back.

Bruce Porter

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